Monday, December 02, 2013

distributor's switch to direct sourcing leads to Lanham Act claim

One way to tell the story of this complaint: company decides
to outsource production of a flagship product to China, gets burned when
Chinese company appropriates its trade secrets, is now sad about that. Somehow
I bet the Georgia workers who lost their work might have something to say about
that.I’ll skip the trade secret part of
the case, but some of the trade secret-based claims do survive.

Plaintiff APT made Critical Cover protective apparel for use
in scientific and medical settings; VWR was formerly its exclusive
distributor.Critical Cover’s protective
coating was allegedly superior to competitors’, giving it a competitive
advantage.The distributorship
agreement, among other things, licensed VWR to use the Critical Cover mark and
bound it to identify APT as the manufacturer and warrantor of Critical Cover
products.

In 2000, APT moved Critical Cover manufacturing from Georgia
to China, where it entered into a relationship with another entity, XXPC, which
became the manufacturer.VWR allegedly
induced XXPC to violate APT’s confidentiality restrictions and make similar
coated products for VWR, at which point VWR terminated its relationship with
APT.

VWR allegedly set out to market its new product lines as
replacements for/continuations of Critical Cover product lines.VWR allegedly got customers to believe that
their well-liked Critical Cover products no longer existed and that they were “simply
being transitioned into the same or similar products by another name.”For example, VWR stated that “VWR Advanced
and Maximum Protection apparel (the products formerly known under the VWR
Critical Cover ComforTech™ and Microbreathe™ brands) will experience a change
in raw materials,” but APT alleged that the products weren’t “formerly known”
as Critical Cover, and also that this statement falsely led customers to
believe that the products came from the same source.The two types of false/misleading statements
alleged were statements that caused consumers to believe that VWR’s products
were Critical Cover products under another name (false because the manufacturer
and the process had changed in that the process was no longer subject to APT’s
quality control and warranties), and statements that misrepresented, at least
by implication, that Critical Cover products had been discontinued.

The court first rejected VWR’s argument that APT wasn’t
really the manufacturer of Critical Cover products; rather, XXPC was.(You know what would really assist this
discussion?Dastar’s statement that “origin” can be stretched to the licensor.)Just because APT partnered with XXPC didn’t
mean that APT wasn’t also a manufacturer—the two weren’t mutually exclusive as
manufacturers.

Anyway, that argument missed the mark because APT also
alleged that VWR’s statements caused consumers to believe that VWR’s products
were Critical Cover products under another name.Because Critical Cover is a valid mark, “any
statements, even if true, that led customers to believe that VWR’s products were
CRITICAL COVER® products would be actionable as false advertising. Unless VWR were to concede it was infringing
APT’s CRITICAL COVER® trademark—which, obviously, it does not do—the CRITICAL
COVER® products are necessarily different from VWR’s own product line.”

Also, APT alleged that the manufacturing process changed
because APT’s quality controls and warranties were no longer present, and VWR’s
trade secret argument seemed to suggest that VWR’s new line didn’t use the
particulars of APT’s alleged trade secret.VWR’s advertising allegedly convinced a substantial number of consumers
that VWR’s products were Critical Cover products under a different brand name.(Dastar
protects the right to copy, which means the right to offer the “same” product
under a different brand name; the court is about to recognize this.)

However, the court pointed out, passing a motion to dismiss
isn’t a guarantee of success.“In fact,
a large and potentially dispositive issue of fact may be whether VWR’s products
were identical, or even superior, to APT’s CRITICAL COVER® products.”If they were, then the false advertising
claim would probably fail because, although VWR products wouldn’t “technically”
be not Critical Cover products because APT owned the trademark, they’d in fact
be identical.Also, the difference would
likely be immaterial, citing Pernod
Ricard and McCarthy.But for right
now, the argument that customers wouldn’t pay APT’s higher prices for identical
products and therefore there was no nexus between VWR’s ads and APT’s harm was
not appropriate on a motion to dismiss.

For similar reasons, the false designation of origin claim
survived, though it had different elements. (But why? This court, like others,
says §43(a)(1)(A) and (B) are basically the same, then applies different
standards: “Unlike a false advertising claim, a false designation of
origin/passing off claim requires not proof of actual confusion, but rather
proof of likely confusion,” even though the likelihood language of the statute
is identical.)Passing off can be either
express or implied—implied is “when an enterprise uses a competitor’s
advertising material, or a sample or photograph of the competitor’s product, to
impliedly represent that the product it is selling was produced by the
competitor.”This can occur through
initial interest confusion.Anyway,
§43(a) doesn’t have rigid boundaries and the liability test should be adapted
to the circumstances at hand.

As a result, the court rejected VWR’s argument that it
hadn’t used any designations falsely but rather fairly and referentially. There was a potential false designation of
origin based on the Critical Cover trademark, though that would fail if VWR’s
product line was the same as or superior to Critical Cover.But if the allegations were proven true, that
would constitute false designation of origin by likely confusing consumers
about whether VWR’s new products were simply Critical Cover products by another
name.Section 43(a) covers this conduct,
“because otherwise a defendant could escape liability for passing off simply by
using another’s mark—a false designation of origin—to establish the equivalency
of the other’s mark and the defendant’s new mark, and then shift to using only
its new mark.”This couldn’t be resolved
at the motion to dismiss stage, because the statements from VWR’s marketing
materials could be read as misleading.Likelihood of confusion would require using the multifactor infringement
test.Although APT’s allegations weren’t
perfect, it did allege specific statements that could create confusion:

“It is also worth noting that we
have not changed the manufacturer, manufacturing location, or the manufacturing
process for 95% of the products in our new line. For the majority of the
portfolio, only the brand name and part numbers will change, and we will
continue to make available the previous line of VWR Critical Cover products for
a minimum of 30 days during this transition.”

“VWR Advanced and Maximum
Protection apparel (the products formerly known under the VWR Critical Cover
ComforTech™ and Microbreathe™ brands) will experience a change in raw
materials.”

“As you are aware, VWR is
transitioning our VWR Critical Cover® apparel line to our new line of VWR
Protection apparel.... [W]e are writing this letter to certify that for 95% of
the products involved in this transition, there will be no change in the
manufacturer, manufacturing location, or manufacturing process.” and

A table, preceded by the text, “In
addition to the above certification, below is a list of VWR Protection apparel
products that will not experience a change in raw materials,” in which “Old
Brand Name” trademarks were aligned with “New Brand Name” product lines.

These are really interesting statements from a nominative
fair use perspective given that VWR was
licensed to use the marks—apparently exclusively—but APT alleged that the
products weren’t “formerly known” as Critical Cover. Here's an exercise: formulate statements that would be protected by nominative fair use in truthfully disclosing the situation.

VWR argued that buyer sophistication would preclude
confusion, and that APT’s harm wasn’t related to the trademark but rather to
its failure to retain other distributors.Those might both be true, but not on a motion to dismiss, even though
APT’s allegations seemed to establish that its customers were sophisticated,
e.g., allegations that the process of qualifying protective apparel for use can
take significant time and resources.(From what I infer, then, VWR’s statements were designed to minimize any
need for requalification.)

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